Think Piece: Regulation and the UK's energy market

Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

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If it ain't broke, break it: how to increase prices and profits in the GB retail energy market

Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.

Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

So what went wrong? Someone or something had to be blamed for the energy price increases. Ofgem was unable to find evidence of market failure. It concluded that the problem was customer failure. Customers were paying high prices because they were unable or unwilling to understand suppliers’ offers. So the market had to be simplified.

An increasingly bizarre series of proposals and directives has emerged from Ofgem, Government and now Which? magazine for dumbing down the retail market. All are well-intentioned, none shows any understanding of competitive markets, none will increase customer engagement, and all will make customers worse off.

Ofgem was first. It noticed that suppliers based in one area were offering lower prices to customers in their competitors’ areas. In 2009 it decided that requiring suppliers to charge the same price to all customers would bring the benefits of the lower prices to all customers - Right? Wrong. Suppliers predictably found it more profitable to raise their low prices to new customers than to lower their prices to existing customers.

Customers suffered because the low-price offers were withdrawn. They also began to lose interest in switching supplier: the switching rate has since fallen by nearly a half. But suppliers did not lose out from this reduction in competition. Quite the opposite: Ofgem’s calculations show their retail profit margins increasing to an all-time high: from minus £10 per dual fuel customer in May 2009 to about £50 from 2010 to 2012 to £100 now.

In 2011 Ofgem proposed that all suppliers should offer the same monthly standing charge – which Ofgem itself would specify. It overlooked – or didn’t care – that this prohibited tariffs with no standing charge, which are popular with pensioners. And that Ofgem would now be jointly responsible for setting energy prices. Ofgem withdrew its proposal.

Meanwhile, suppliers found other ways to compete – for example by offering lower prices online. Customers benefited – until Ofgem decided that this made the market too complicated. In October 2012 Ofgem proposed that suppliers would be allowed only four tariffs per fuel. This of course is tough on customers with minority tastes, like green tariffs, or even tariffs with no standing charge.  And innovation will cease if a supplier can only innovate by withdrawing an existing tariff that supplies about a quarter of its customers. But now it’s simplicity that counts, not the availability of products that customers want.

There are other petty restrictions. Discounts must be the same each year, expressed in pounds not percentages. If this restriction had been in place, it would have banned the best offer in the market earlier this year. And in future it may not be viable for suppliers to offer discounts that don’t use percentages to tailor the discount to the size of bill. But the availability of good offers is no longer a relevant consideration.

At the same time, another bright idea popped up at Prime Minister’s Question Time. Just in time for the County Council Elections. The campaign leaflet says “Conservatives in Government have forced energy companies to put customers on the lowest tariff”. Leave aside that this is not yet enacted, and still just an idea that Ofgem might reluctantly trial. Leave aside too why Conservatives in Government and not Ofgem are now regulating energy companies. Let us just ask: what does it mean and is it a good idea?

If it means that energy suppliers will be forced to put their own customers on to the lowest tariff offered by their rivals, is there the remotest chance of this working? Suppose it means that energy suppliers will be forced to put customers on the lowest tariff they themselves offer. But if a supplier offers a discount on its standard tariff coupled with an exit charge of £50, do we really want to force that supplier to put all its customers on a tariff that locks them in? And if a supplier wanted to offer a discount for new customers, but was forced to put all its existing customers on the same discounted tariff, isn’t it obvious that it would be more profitable not to offer the discount in the first place? Once again, the proposal will drive out the best offers.

The latest bonkers suggestion is from Which? magazine. It says that Ofgem’s proposals for simplifying the market don’t go far enough. The government should require single unit prices for each energy tariff, like petrol prices on a garage forecourt. Simplicity is flavour of the month, and petrol is a competitive market, so what’s wrong with this? Lots.

First, Which? seems to be asking for a single uniform price across the whole of the country. But distribution network charges vary considerably across the country. To impose a uniform retail price or network charge would require massive geographic cross-subsidisation between network operators and between customers that would be neither workable nor obviously equitable.

Second, forcing all tariffs to have a zero standing charge would mean that suppliers would not be allowed to offer a lower unit price to larger customers that are more economic to serve, and suppliers would no longer be interested in attracting smaller customers. The likely impact on different kinds of customers has not been considered.

Third, limiting the variety of energy products so that customers are faced with only one price per supplier would enable and encourage suppliers to coordinate prices. If one supplier breaks ranks then other suppliers will either follow or that supplier will fall back into line. Customers will find that suppliers offer similar prices almost all the time. Where then is the incentive to engage in the market?

All these schemes assume that regulators and governments know more about customers than those who make a living by discovering and providing what customers want. These schemes won’t really simplify the market and they won't persuade customers to engage more. But they will restrict competition, and customers will be worse off because the best offers will disappear. Suppliers will find it costly to comply with the proposed 126 pages of new regulatory red-tape, but the costs will be passed through to customers and the suppliers will grumble all the way to the bank.

Britain’s claim to have a leading competitive energy market and regulatory body is no longer tenable. “If it ain’t broke, break it” may sound like action, but it will not, ultimately, be persuasive to customers.

Gap Year work at the Adam Smith Institute

The Adam Smith Institute is looking for a bright, enthusiastic student on their gap year between school and university to come and work for us. The role would be a mixture of administrative work around the office and helping the ASI team with their research and policy work on an ad hoc basis.

It’s a great opportunity if you want to gain some experience in an exciting think tank. We are nice, fun people to work with, so candidates should enjoy working with others as part of a team. You should be interested in our work and willing to roll up your sleeves to do some of the less glamorous work around the office too.

This position pays £6.31/hour, and depending on the candidate is either a six-month or year-long position.

If you’d like to apply, send the following to tng@old.adamsmith.org:

  1. an up-to-date CV;
  2. two hundred words about yourself and why you think you’d be good for the job;
  3. a four hundred word blogpost in the style of the ASI blog about why liberty is the best policy in an area of your choosing.

Applications close on June 22nd.

23 Things We're Telling You About Capitalism XI

The eleventh thing we've not been told about capitalism is so bizarre as to make me wonder whether Chang was proofread before publication. The layout of the free market position is that Africa is irredeemably doomed to low or no economic growth because of structural factors: ethnic diversity, disease, geography and so on. And the reason that we free marketeers say this is because we're embarrassed about the fact that Africa instituted free market reforms in the 80s and hasn't grown since then. Thus we've invented reasons as to why it hasn't rather than rethinking our committment to free market development.

Chang also tells us that post colonial Africa grew rather well (hmm, well, even he admits not well but better than nothing) in the 60s and 70s. So therefore we free marketeers are doubly wrong. We not only killed off what was working we also prescribed what does not and are now lying about it.

There is one teeny little problem with this. Chang has shifted his decades a bit. There was indeed a change in the 80s but this wasn't the widespread adoption of free market policies. That was the debt fuelled autarkic development that was abandoned. Actual free market policies didn't take root until the 1990s in sub-Saharan Africa (the place Chang and we are talking about) and since the mid-1990s there has indeed been a take off in growth in those countries.

In fact, if we look at the work of people like Xavier Sala-i-Martin (do look him up, his web page is a hoot but he's also one of the most cited economists around) we find that Africa is growing so well that they've actually got rising Sen Welfare. That is, not only are incomes going up but inequality is falling at the same time.

What drove the much slower growth of the 60s and 70s was exactly the set of policies that Chang usually proposes. Infant industry protection, government direction of the economy, planning. And most crucially, borrowing to fund that economic development. And, as is usually the problem when people play socialism at some point you run out of other peoples' money. The actual investments that were made (just about every country decided they needed an integrated steel mill for example. Almost none of which ever worked at anything like capacity as the continent could really support perhaps two, not the dozens planned) simply never did pay back the borrowings made to construct them. So the policy of state directed development not only didn't work it came crashing down in a ghastly and impoverishing heap.

What happened to African development is an argument against Chang's policies, not one in favour of them. And I've already mentioned that I'm not sure that you can do Chang's form of directed development in a democracy. Even if (which I'll not admit anyway, but just for the sake of argument) you can do it in an authoritarian or repressive society, the political dynamic is such that you can't wher the people get to vote.

Take, as an example, Ghana. Nkrumah very definitely believed in the socialist and state directed development model. Vast sums were borrowed in order to construct the industry it was thought the place needed (and there were many a western socialist writing these plans in Accra at the time). But while Nkrumah did become increasingly repressive himself he did still face democratic pressures. So the economic policies favoured the urban population, those who tended to vote (or even riot where they could be seen) rather than the larger rural one. The exchange rate was fixed high for example: to the great detriment of the cocoa farmers trying to export, to the great benefit of the urbanites who wished to import goods. There was indeed an attempt to have that planned economy, to build and protect those infant industries. It's just that they were all bad plans: and as I say, I'm convinced that at least part of the reason the bad ones were followed was precisely because it was a democracy.

No, this does not mean that I think that we should have authoritarian government in order to attain economic development through planning. Quite the opposite: that given that we've got democracy we cannot have that planning because the democratic pressures will lead to bad planning.

So, Ghana, and everyone else who tried to follow the same development path (pretty much everyone) ended up going bust. Which is what gives us the slump of the 80s. Finally the recommendations of the Washington Consensus manage to trickle through the intellectual barriers (and let us recall that the Consensus is really just a list of stupid thing you shouldn't do) and to be applied in the 90s. Since then we've had good and decent growth in sub-Saharan Africa. Hurrah etc: but that is a very different story indeed than the one Chang is telling. Which is what rather makes me wonder whether the book was proofed before publication.

There is one little aside as well. Chang does correctly point out that many to most African countries have bad external transport links. For reasons both historic and geographic. What puzzles me is this. Given that Chang says that a country should not leap into the global marketplace, but should develop at least to begin with behind its own borders, well, given that Africa's had no choice in this, why isn't it developed? If few imports lead to economic development as this encourages domestic production then why haven't African countries developed as they've had few imports?

That is just an aside though. The real problem with our eleventh thing is that Chang just isn't describing things as they really did happen. Sub-Saharan Africa did do the planned and tariff bound infant industry protection thing in the 60s and 70s. And growth was there but feeble: and then the entire system went bust. Once the mess was cleared up and free market policies adopted in the 90s we've seen good and decent growth across the region. And no, it's not the free marketeers who have been ascribing Africa's problems to anything other than economic policy. Quite the contrary: we've been using the benighted continent as absolute proof of our contentions. Managed development was tried and failed: free market development is working.

Eurovision song contest costs UK

Do you realise how much we pay for the thrill of watching dancing meatballs?

A couple of years back, Ewan Spence had the same question, and put in a Freedom of Information request to the BBC, Eurovision's sponsoring partner in the UK. They refused to disclose all their production costs for broadcasting the competition on BB1, BB3 and Radio 2. But they revealed that the payment the BBC makes to the European Broadcasting Union was £279,805 in 2009, and £283,190 in 2010.

Since then, journalists have been watching the Eurovision bill grow. Last year, the BBC spent £310,000 – the eqivalent of 2,130 licence fees – on broadcasting Britain's disastrous entry by 76-year-old singer Engelbert Humperdinck (which only four countries gave any points at all—not that we have had many points since the Eastern Europeans turned up and formed a pact to vote for each up).

BBC officials say that their EBU membership also buys it other things, like membership of a news exchange, rights to concert broadcasts and activities around the Olympics. But broadcasting the Song Contest also imposes other costs on the BBC, including travel, hotels and incidentals for its broadcast staff.

Last year, the contest cost €48m to stage in Baku, Azerbaijan. This year's, in Malmö, Sweden, the aim was to do it for much less. Anyone with a television (i.e. virtually everyone) is forced to pay for this embarrassing, political show, whether they watch it (and the BBC) or not. Can that be right?

23 Things We're Telling You About Capitalism X

The tenth thing we have to understand is that actually Americans aren't as rich as all that. This is very important because if that sort of free market capitalist society did lead to the richest society on Earth then of course all the other strictures about how awful free market capitalism is would be rather wasted. We'd start to believe our own lyin' eyes rather than the Reader in Economics at Camdridge and that would just never do.

The rest of the chapter is just hemming and hawing about how we should change the figures to show that actually Americans are not the richest society on the planet. Well, OK, even I'm not going to claim that there aren't certain microstates that beat the US: Luxembourg for example. But comparing a few hundred thousand people to 300 million seems rather like cheating. It would be like comparing Manhattan to Texas for example, just not quite fair. Or, again about the same distortion of scale, comparing the residents of Eaton Square to the entirety of Luxembourg.

Chang has two basic methods in use here to show that the American Dream is just that, a wraith. After we go through all the various ways that we can measure income he agrees that Purchasing Power Parity is the right one. Which is good, for it is. We don't measure just incomes, but incomes as compared to prices in the places the people are living. This gives us a much better idea of living standards. And by PPP measurements, absent those microstates, the US is indeed the winner. To which Chang says but hang about a bit.

Firstly, we know that the US is a more unequal society than many others. Thus the average doesn't give us a true view of how people really live. In an unequal society there will be more people below that (mean) average and thus the real average (ie median) living standard is lower than in a more equal society. Which could even be true but it's not all that large an influence. After we account for all of the taxes and benefits then everyone from Sweden to the US is in a gini (the way we measure inequalty) range of 0.25 to 0.38 or so. And the scale does run from 0.01 to 1.00.

More importantly perhaps we do have some evidence of what actual living standards are at the bottom of the pile in a number of different societies. This chart:

These are the incomes at PPP (so adjusting for price differences) after taxes and benefits. And the comparison is to US median income: so, the bottom 10% in Sweden get 38% of US median income. The bottom 10% in Finland get 38% of US median income. And the bottom 10% in the US get 39% of median income.

Hmm, I think our contention that the US higher average income isn't really valid because the poor get less than the average....thus the greater inequality means that the lives of the poor in the US are worse off than the poor in other countries....doesn't really stand, does it?

The US is definitely a more unequal country. But the poor seem to be about as well (or badly) off as the poor elsewhere.

The other trump that Chang plays is to point out that Americans have longer working hours than people in most other countries. Given that slaving away over a hot desk isn't what life is all about then perhaps we shouldn't all attempt to emulate this US lifestyle then? And while it's true that money isn't everything and that very few of us go into that long dark night bemoaning the paucity of hours we spent working for The Man, Chang has committed a terrible error here. He has assumed that the only form of work we do is paid working hours.

The actual division made is between personal time (we cannot get someone else to sleep for us, take our shower for us), paid working time, household production time and the balance left over is leisure time. The important point to note here is that there is that unpaid working time: that time spent in household production. We might think of digging the allotment to feed the family, childcare time, cooking time, washing and cleaning, repairing the car. It is this time plus paid working time for The Man which produces total working time. And when we look at this total working hours it isn't obviously true that Americans do work more hours than, say, Europeans. It is also possible to substitute household production for paid working time and vice versa. Once can slave over the hot desk to buy a takeaway, or slave over a hot stove to make up for the lack of income from the time not spent at the desk.

In fact, when people actually study exaclty this question (ie, here) they find that the opposite is true, Americans don't work longer hours. For example, the average German woman is working an hour and a half a week more than her US equivalent. And for the men the working hours are almost exactly the same. The German woman might be making sauerkraut at home (I know, terribly culturalist of me) while her American sister goes out to work, earns the money and they buys it: in the process the American sister gaining more leisure time than the German.

It is indeed true, as Chang states, that Americans do more paid working hours per year than Europeans. It is also true that the US is a more unequal society than most of Europe (Italy is actually more so than the US). However, the American poor have incomes around and about the same as the European poor. Americans work fewer unpaid, household production, hours leading to equal or greater leisure time. And as Chang has already admitted, the Americans do indeed, on average have both higher incomes and greater command over consumption opportunities as a result of those higher incomes.

The poor get about the same: the regular guy is both richer and has equal or greater leisure time? Perhaps there is something to say for this free market capitalism stuff they have in the US then?

Footnote. For those who think we shouldn't be talking about household production, please read the Stiglitz Report. The entire issue is well explained there.

Think Piece: Busting welfare myths

The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Here is my take on what we should and shouldn’t believe.

Myth: Welfare spending that goes on pensions is unreformable.

Reality: The state pension eligibility age has risen too slowly.

Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.

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Ten reasons why the Left should like the ASI, 10: Jobs

The Left should back the ASI's proposals to increase the numbers of jobs available, especially for those of relatively modest skills.

The ASI takes the view that the best welfare measure of all is paid employment.  Someone in a job that pays wages or a salary can meet their needs and advance their status far better than anyone dependent only on state support.  The ASI supports measures than can boost job-creation by making it easier and cheaper to employ people.  It is made easier by reducing the paperwork and regulatory compliance required of would-be employers, and it is made cheaper by reducing the tax burden that falls on them.

Since about two-thirds of new jobs are created by small employers, the ASI has concentrated on the small business sector, proposing a lighter regulatory environment for them than for business in general.  The large firm can afford the costs of compliance more readily than can the small or start-up business.  One of the ASI proposals is that small firms should be allowed to treat their workers as self-employed, removing the need for employers to calculate and handle PAYE and NI payments, as well as reducing the non-wage provision they are obliged to provide for employees.  This would greatly boost the number of jobs, and be particularly effective at encouraging the one-person business to overcome the barriers that discourage it from taking on its first employee.

Although part of the Left wants to concentrate on securing more rights for those already in jobs, the rest of them should support ASI proposals that could greatly increase the jobs available and therefore the employment opportunities for those seeking jobs, especially young people.  They should also note that it is today's start-ups that will secure jobs in Britain's future, and support the ASI's commitment to an expanding future for employment.

Busting welfare myths

The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Geoffrey Taunton-Collins gives his take on what we should and shouldn’t believe.

Myth: Welfare spending that goes on pensions is unreformable.

Reality: The state pension eligibility age has risen too slowly.

Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.

Myth: capping housing benefits is a long term solution

Reality: the housing crisis will only be solved by increasing supply

The next biggest outlay after pensions is housing benefit. This takes up 11% (£20bn) of the welfare budget. The government has made some savings by putting a cap on welfare at £26,000 (if a household’s benefits are in excess of this figure housing benefit is reduced until they fall into line). A more fundamental solution would be a liberalisation of planning laws to allow development in areas where it is currently blocked. The strangling of supply is the cause of relentless house price and rent inflation. If development rights were auctioned off and the proceeds given to local residents this would alleviate both the problem of NIMBYism and the government’s bloated housing benefit bill. It would also have the corollary benefit of helping young people onto the housing ladder, and would preserve the vast majority of our rural spaces.

Myth: The government’s ‘making work pay’ initiative is merely a cover for cuts.

Reality: Some in-work benefits will have to rise if work is ‘to pay’.

The benefits system is riddled with financial disincentives to move into work. The government is trying to eliminate them so that welfare prevents poverty not job-taking. What is rarely acknowledged is that eliminating disincentives sometimes implies increasing benefits. Notably, those entering work often face aggressive withdrawal rates (Job Seekers’ Allowance and Income Support have 100% withdrawal rates) and if work is to pay these sudden withdrawals will need to be smoothed out. The gist of the Universal Credit is to have fewer people receiving out of work benefits in the long run, but not necessarily to give those on welfare less money. We should therefore be weary of clichéd claims that the Universal Credit is a veil for welfare cuts.

Myth: Immigrants sponge off welfare

Reality: Benefits tourism is miniscule

Immigrants are 60% less likely than natives to receive state benefits or tax credits and only 6.4% of total working age benefits go to immigrants. Further, immigrants from the ‘A8’ (the Eastern European countries entering the EU in 2004) pay 37% more in taxes than they receive in public goods and services. Of course, this tells us nothing about the social impact of the 3 million new people (between 1997-2010) who have moved to Britain, and tried to assimilate into British culture. It does confirm, however, that scare-mongering about benefits tourism is unfounded.

Myth: benefit fraud is rife/ benefit fraud is negligible

Reality: We have no idea how common benefit fraud is

The simple fact is that there are no reliable figures on benefit fraud (and so we have no idea if the public overestimates it incidence). The most commonly used figure comes from a 2011/12 report from the DWP which estimates that 0.7% of expenditure goes on fraudulent claims. But benefit fraud amounts to fooling the DWP into thinking you are entitled to more than you actually are, so to suppose the DWP’s figures are accurate is to suppose that British benefit fraudsters aren’t very successful – which is to beg the question. Polls show that Brits think 27% of the welfare budget goes on fraud, in the absence of more reliable figures we cannot endorse or deny this estimate.

Myth: the public think that 41% of welfare goes on job seekers’ allowance

Reality: they think that 41% goes on benefits for the unemployed

It has become common in some circles to consider the British public misinformed about job seekers’ allowance spending. Brits are accused of being wildly off the mark since only 3% of the welfare budget actually goes on this benefit. This is unfair – the 41% figure comes from a TUC poll which asks how much is spent on ‘benefits for the unemployed’. Unemployed people can receive housing benefit, child benefit, free school meals, tax credits and so on – in other words they receive far more in benefits than just job seekers’ allowance.

The AA and manipulation of the petrol price

On Friday the AA hit the newspapers with the allegation that there are shadowy companies in the petrol market. Speculators even: they buy up petrol, sit on it until the price rises and then, horrors, make a profit!

Few of the traders’ names – including Glencore, Cargill, Gunvor and Trafigura – are known to consumers outside the oil industry, but their effect on Britain’s 33million motorists and the wider economy is profound. They buy huge quantities of petroleum on the open market and store it until the price goes high enough to make them a handsome profit, at which point they sell.

It's an interesting contention, isn't it? That future prices are well enough known that you can make sure and certain profits just by storing something for a little bit. I'm particularly suspicious of the allegation in that at least some of those companies are wholesalers of petrol: the people who buy the tanker loads that the oil majors like to sell and split it up into the truck loads that petrol stations like to buy. And yes, there are more such companies these days as the oil majors pull back from their downstream activities.

The allegation then goes on that consumers are losing out as a result of the actions of these companies. Something which is by no means certain as, yes, it's Adam Smith time at the ASI once again, points out in WoN, Book IV, Chapter 5 para 40 and following. Smith is talking about wheat but the same basic concept applies to petrol.

The speculator at least attempts to purchase in a time of plenty, when prices are low, then sell in a time of dearth when prices are high. By doing so he raises prices when they were cheap: yes, indeed he does. But he also lowers them in time of dearth by releasing produce onto the market when it is expensive. So the net effect on hte consumer might well be nothing at all: the price has been moved through time but total expenditure on wheat (or petrol) remains the same.

Our speculators have made their profit: and if the consumers are paying the same total amount that profit cannot be coming from them. No, instead, it's coming from the original sellers: in this petrol case that's the oil majors and their refineries.

Which really rather changes this story, doesn't it? Even if the AA is right here, "Speculators rip off motorists" and "Speculators rip off oil companies" will play rather differently in the public press. And it's very likely indeed that the story is actually the second one.